Newspaper publisher and property developer Singapore Press Holdings Limited (SGX: T39) has experienced a steady decline in its return on equity (ROE) over its last five fiscal years.

You can see in the chart just below how the company’s ROE had fallen by nearly half from 16.6% in FY2011 (fiscal year ended 31 August 2011) to 8.5% in FY2015.

Source: Singapore Press Holdings’ annual reports

The return on equity (ROE) metric measures a company’s ability to generate a profit with the shareholders’ capital it has. Generally speaking, a high ROE is preferred over a low one, all things being equal. The ROE metric can also be broken down into three other components:

ROE = Profit Margin x Asset Turnover x Equity Multiplier

Some of you may find the formula familiar. It is actually the DuPont formula, created over nine decades ago in the 1920s by the DuPont Corporation to gauge its own internal efficiency.

Given Singapore Press Holdings’ sinking ROE, some investors may be curious about the drivers behind the phenomenon. So, let’s see what the DuPont formula can tell us about the company’s ROE-trend.

The company is a publisher of many of Singapore’s major newspapers and magazines, such as the Straits Times and The Business Times. It also engages in property development, investment, and other activities such as events management. As part of its property-related business, Singapore Press Holdings is the majority owner and manager of SPH REIT(SGX: SK6U), a real estate investment trust which owns retail malls in Singapore.

With that, let’s get our hands dirty with the DuPont formula and the company. The following chart illustrates the first component of the formula, Singapore Press Holdings’ profit margin:

Source: Singapore Press Holdings’ annual reports

As the chart indicates, Singapore Press Holdings has managed to keep its profit margin flat between FY2011 and FY2015, and so it’s not really a big culprit for the falling ROE. Moreover, in FY2015, the company’s profit margin was 30.7%, which is one of the highest amongst the 30 constituents of the Straits Times Index (SGX: ^STI). (Singapore Press Holdings is one of the 30 stocks that make up Singapore’s stock market benchmark.)

The next two components of the DuPont formula are shown in the chart below:

Source: Singapore Press Holdings’ annual reports

The blue line is for the asset turnover, a measure of how good Singapore Press Holdings is at utilizing its assets to generate revenue. It is calculated by dividing the company’s revenue with its assets. Generally, a higher asset turnover translates to a better performance.

The metric has deteriorated from 0.32 in FY2011 to 0.19 in FY2015 and has dropped pretty consistently over the timeframe we’re looking at. Falling revenue at Singapore Press Holdings’ core media business had been a big reason for the lower asset turnover. The company’s newspaper advertising revenue has fallen for many years consecutively.

The orange line is the equity multiplier and it is found by dividing a company’s assets with its equity. It is a gauge for how much leverage – and thus financial risk – that Singapore Press Holdings is taking on. Putting all other things equal, higher leverage will result in a better ROE – but at the expense of a weaker balance sheet.

SPH has been deleveraging, as seen from its equity multiplier dipping from 1.69 in FY2011 to 1.40 in FY2015. The lower equity multiplier however, also contributed to the declining ROE.

A Fool’s take

To sum up what the DuPont formula has showed us, the main culprit behind Singapore Press Holdings’ lower ROE is its falling asset turnover and equity multiplier. The company has been able to maintain its profit margin so far, but investors may want to observe if it can continue to do so in the future. As mentioned, the company’s core media business has been facing years of difficulties.

It should be noted that more work needs to be done beyond the DuPont analysis before any firm investing conclusion can be made on Singapore Press Holdings. This look at the company’s ROE should only be seen as a useful starting point for further research.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Wilson Ong doesn’t own shares in any companies mentioned.

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